23 November 2019
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Can Kathmandu climb higher?

Andrew Main
21 March 2017

By Andrew Main

You know backpacking’s moving to another level when a pair of wheels can pop out of the base of the pack so it can become a wheeled suitcase.

That’s what outdoor outfitter Kathmandu Holdings recently did, winning an award for the clever design of the Terrane Adapt pack, as it’s called.

It’s also interesting to note that in the latest half-yearly results announcement, which saw a 6% lift in net profit to exactly $NZ10.0 million despite a tiny lift in overall sales, Kathmandu is deliberately walking the city-country tightrope.

It features a photograph of a neatly coiffed female hiker climbing what looks to be The Peak in Hong Kong, having clearly got bored waiting for the Peak Tram.

But that’s what companies like Kathmandu have to do these days. On the assumption that most hardy outdoorsy types have already got most of the kit they need, the New Zealand based company clearly has to look for new markets.

And as with all Kiwi-based companies, there’s a lot of stretched geography. The main operations are in Australia, where sales are almost twice what they are in the home country, but meanwhile they’ve had to close two UK stores, a move which which saw the company report a 57% drop in overall sales there.

In fact, the UK wasn’t a big part of operations, producing a mere 700,000 pounds in sales in the half as it closed three cycling stores that clearly hadn’t taken off. The company’s now going to stick to online and wholesale business there.

Online overall is on the up, reaching 7.4% of total sales, having climbed by 18% year on year.

Kathmandu management was able to announce yesterday that overall sales were still marginally up at $NZ196.3 million, a lift of $NZS300,000 over previous.

Clearly, the result was in line with or slightly above expectations, with previous guidance having predicted $NZ9.9 million with the shares, which had run up past $3.50 in Australia back in early 2014, opening steady at $1.78.

The interim dividend was lifted 33% from NZ3c to NZ4c but because the company pays its taxes on the other side of the Tasman, it’s not franked in Australia.

Recently, appointed CEO Xavier Simonet said the result was in line with expectations, and highlighted the 6% increase in sales in Australia, which indicates a strong Christmas season in a market which has lately been something of a disaster area for the apparel business.

He also noted that coming out just ahead of square on the half was a solid achievement given there had been around $NZ4 million of adverse currency impacts on gross margin.

“We have had a solid start to FY17 but as always, the success of our full year result will hinge on key sale periods that fall in the second half.”

That’s a reference to Easter, which this year will be very late, falling in mid April. That’s good news for Kathmandu in this hemisphere, as the later Easter falls, the more warm clothing they should be able to sell. As Scottish funnyman Billy Connolly notably observed, there’s no such thing as bad weather: just unsuitable clothing.

A big problem for the company is that most canny hiking types wait until there’s a Kathmandu sale on before they darken the doors, and management grumbled that a higher proportion of clearance sales year-on-year had an effect on gross margin. Welcome to the retail business.

Not that they should grumble too loudly: that gross margin is still at 61.6%, down only a fraction from 62.8% previously.

There’s mixed news on Kathmandu out there, what there is of it, from the brokers. Morgans has stopped following the stock, most probably because it’s just dropped out of the ASX 300, but Deutsche Bank and Macquarie both gave the stock a modest cheer on February 8 after the first-half trading update. They should have more to say today.

Because Kathmandu trades both here and in its home jurisdiction, Deutsche has a price target of $NZ2.25 on the stock.

Analysts were pleased by the Christmas sales performance and encouraged by what it says should be “a credible strategy for low risk offshore expansion.” That’s a compliment of sorts to the decision to close those stores in the UK.

Note that while the stock did nothing much in Australia yesterday, sticking at $A1.78, it climbed NZ4c in early trading across the ditch to $NZ1.97. Perhaps it’s all about a lack of alternative NZ equity stories in a quiet week.

Macquarie damned with faint praise by stating that the half-year result was likely to be “better than feared” - and it was.

“Strong sales and tight expense controls have offset margin pressure from higher US dollar sourcing costs,” the broker stated, making it clear it likes Monsieur Simonet’s success in revitalising aspects of the merchandise part of the business and working on turning profitability round.

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